Hong Kong Institution of Engineers

Alternative Dispute Resolution Committee

jointly organised with HKIAC & HKU Dept of Real Estate and Construction

Law of Contract
 
for Resolving Construction Disputes

Presented By : Ir Teresa Cheng SC
Ir Gary Soo

30 July 2010

Copyright © 2010 Teresa Cheng SC & Gary Soo.  All Rights Reserved
 Rundown

0900 Registration
0910 Welcome
0915 Fundamentals of Contract Law
1030 Break
1045 Payments, non-payment and late payment in Construction
Contracts
1145 Extension of Time and Liquidated Damages, Prolongation Costs

& Disruption Claims

1300 Lunch
1400 Variations and Changes
1515 Break
1530 Termination of Construction Contracts
1630 Dispute Resolution
1730 Closing Remarks
Fundamentals of Con
Contract Law
 Fundamentals of Contract Law

‘A contract is a promise or set of promise

that the law will enforce.’
‘Disputes (and damage) are locked in once
a contract is formed.’
‘Getting the contract right and in writing is
most fundamental!’
 Fundamentals of Contract Law

Formation of contract is to be tested objectively.

Interpretation of contract is to find out its meaning as
conveyed to a reasonable man
Elements:
A valid Offer
with effective Acceptance
supported by Consideration
with Intention to create legal relationship
by parties with Capacity to contract
in a legitimate context
Types:
Oral, Written, Conduct…or just a Combination
Parol evidence rule - Consort Engineering Co Ltd v. Leung

Wai Ying alias Tommy Leung trading as Kin Ming Company

 Fundamentals of Contract Law

Ascertaining the express terms of the contract - Grand Choice

Construction Co Ltd v. Dillingham Construction (H.K.) Ltd &

Man Keung Co Ltd v. Prosperity Machinery Manufacturers Ltd

‘Whole Agreement Clauses’

Implied Terms
By legislation (e.g. Nippon Kanzai Centre Co Ltd v. Ho Biu
Kee Construction Engineering Co Ltd)
Implied in law (e.g. ‘business efficacy’ in The Moorcock)
Duty to co-operate (Luxor (Eastbourne) Ltd. v. Cooper :
“…where B is employed by A to do a piece of work which
requires A’s co-operation…it is implied that the necessary co­
operation will be forthcoming” - Lee Chau Mou t/a Chau Mou
Engineering & Co v. Kin Sing Engineering (HK) Co Ltd)
Factors - BP Refinery (Westernport) v. Shire of Hastings
 Fundamentals of Contract Law

A breach of contract occurs where, without lawful excuses,

a party either fails or refuses to perform its contractual
obligation.
Classically, a term can be a ‘condition’, a ‘warranty’ or an
‘intermediate term ’.
All breaches entitle the innocent party to damages, if any.
Breach of ‘condition’ or ‘intermediate term’ may be a
fundamental breach that goes to the root of the contract,
i.e. a repudiatory breach that can immediately discharge

the innocent party from further performing the contract

(Hong Kong Fir Shipping v. Kawasaki Kison Kaisha &

Mersey Steel & Iron Co. Ltd. v. Naylor).
There can also be other remedies available, i.e. specific

performance, injunction or by way of quantum meruit.

 Fundamentals of Contract Law

Aim : so far as money can do as if the contract had been

performed
Difference in value
Costs of cure/repair
The 9 inches difference that worth ￡21,560 - Ruxley
Electronics and Construction Ltd. v. Forsyth
Other consequential losses (e.g. other economic loss or
interest etc. - Hadley v. Baxendale)
Duty to mitigate
Duty to take all reasonable steps to minimize one’s loss

The fundamental basis is thus compensation for pecuniary

loss naturally flowing from the breach; but this first
principle is qualified by a second, which imposes the loss
consequent on the breach, and debars him from claiming
any part of the damages which is due to his neglect to take
such steps” - British Westinghouse v. Underground Railways Co.
Payments in Construction Contracts

Payments in Construction Contracts

Right to Payments
Doctrine of Entire Contract vs. Doctrine of Substantial

Performance - H. Dakin & Co., Ltd. v. Lee and Hoeing

v. Isaacs
Progress or Staged or Interim Payments
Quantum Meruit
 Payments in Construction Contracts

Non-payment at Common Law

Non-payment as breach of contract - Interests
Non-payment as repudiation of contract
Right to suspend work?
Mersey Steel and Iron Co. v. Naylor, Benzon & Co. ­
Contract for sale of 5,000 tons of steel delivered by 5
instalments, each to be separately paid for. HELD:
Payment for previous delivery not condition precedent to
right to claim next delivery
BUT
Creatiles Building Materials Co. Ltd. v. To’s Universe
Construction Co. Ltd.

Hongkong Underground Engineering Ltd. v. Welcome

Construction Co. Ltd.

 Payments in Construction Contracts

Non-payment under the Contract

Contractual provisions for termination upon notice

HKIA/RICS(HK) standard form

“Pay-when-Paid” clause? - Hong Kong Teakwood Works

Ltd. v. Shui On Construction Co. Ltd. & Honeywell Ltd. v.
Kin Ming E& M Works Ltd.
 Payments in Construction Contracts

Certification

General rule

No certificate no payment

Formality

Certificate copied to sub-contract - Pyrok Industries Ltd.

v. Chee Tat Engineering Co. Ltd.
Certificate signed but not delivered - London Borough
of Camden v. Thomas McInerney
Payment without certificate
Waiver
Disqualified
Prevention by employer
Death or incapacity
 Payments in Construction Contracts
Interim Payments
“Certification may be a complex exercise involving an
exercise of judgment and an investigation and assessment of
potentially complex and voluminous material. An assessment
by an engineer of the appropriate interim payment may have a
margin of error either way…At the interim stage it cannot
always be a wholly exact exercise. It must include an element
of assessment and judgment. Its purpose is not to produce a
final determination of the remuneration to which the
contractor is entitled but is to provide a fair system of monthly
progress payments to be made to the contractor.” - Secretary
for State for Transport v. Birse-Farr Joint Venture

Problems of non-payment?
EOT & LD
 EOT & LD

Contractual provisions as to time

Exist parallel with common law rights (e.g. quantum

meruit )

Modify common law rights (e.g. liquidated damages)

Add common law rights upon breach (e.g. termination)

Commencement date
Completion date
LD & EOT clauses
Wholly borne by employer (e.g. late drawings or 3rd

parties)

Wholly borne by contractor (e.g. shortage of plants)

Shared between employer and contractor (e.g. inclement
weather)
Excusable vs. Non-excusable
Compensable vs. Non-compensable
 EOT & LD

Example: “HK$3,000.00 per day”

Rationale: “The fact that in certain circumstances a party to a
contract might derive a benefit in excess of his loss does
not…outweigh the very definite practical advantages of the
present rule of upholding a genuine estimate, formed at the time
the contract was made of the probable loss …Since it is to their
(the parties) advantage that they should be able to know with a
reasonable degree of certainty the extent of their liability and the
risk which they run as a result of entering into the contract. This
is particularly true in the case of building and engineering
contracts. In the case of those contracts provision for liquidated
damages should enable the Employer to know the extent to which
he is protected in the event of the contractor failing to perform
his obligations” - Philips Hong Kong Ltd. v. The Attorney-
General of Hong Kong
 EOT & LD

Other Issues
What if no loss at all?

What if more loss?

Deduction of liquidated damages

Valid clause, i.e. not otherwise as a penalty
Definite start date for deduction
Definite end date for deduction
No non-compliance nor other default on the part of
employer
Breach of condition precedent
Date to run?
 EOT & LD

Delay of works vs. delay of completion

Rationale for extension of time clauses
Time at large
where an act of prevention by the employer creates
delay and that delay is not covered by an extension of
time provision; and, to a lesser extent;
where the provisions for extension of time have not

been properly administered or have been misapplied;

where there has been waiver of the original time
requirements
where there has been interference by the employer in
the certifying process. (Wells v. Army & Navy Co­
operative Society Ltd.)
Peak Construction (Liverpool) Ltd. v. McKinney

Foundations Ltd
 EOT & LD

Proving Delay and Disruption

Demonstrating nexus between cause and effect

Global claims - John Doyle Construction Ltd. v. Laing

Management (Scotland) Ltd.
Normally, individual causal links be demonstrated

Cumulative effect could be relied on where impossible

to separate specific loss and expenses
Global claim failed if a (significant?) cause of loss and
expenses not liable
 EOT & LD

Proving Delay and Disruption

“… the purpose of the power to grant an extension of time …
was to fix the period of time by which the period of time
available for completion ought to be extended having regard
to the incidence of the relevant events, measured by the
standard of what is fair and reasonable ”
“… if there are two concurrent causes of delay, one of which
is a relevant event, and the other is not, then the contractor is
entitled to an extension of time for the period of delay caused
by the relevant event notwithstanding the concurrent effect of
the other event” BUT “…an architect is not precluded from
considering the effect of other events when determining
whether a relevant event is likely to cause delay to the works
beyond completion”
“…the approach must always be tested against an overall
requirement that the results accords with common sense and
fairness” - Balfour Beatty Building Ltd. v. Chrestermount
Properties
Variations & Changes

 Variation & Changes

General Principles
Scope of contracted work

Agreement to pay

Implied obligations
Written Requirement
Contractual condition for varied work
Contractual condition for payment
Binding quotation?
Time implication?
Non-action of engineer?
Waiver?
Estoppel?
 Variation & Changes

The Unit Rate

Applicable rate
Item coverage
Rate built-up
Reasonable sum: Market rate, At-costs & Costs
plus?
Quantum meruit claim

No agreement to pay

Incomplete contract

 Variation & Changes

Secretary for Justice v. Sun Fook Kong (Civil) Ltd.

Rock excavation & removal measured as 7,048m3

Unit rates for 70m3, 20m3 & 100 m3 at $5,000, $8,000 &
$5,000 and others for 1m3 at $3,000
Clause 59 giving difference of $31M

Nature and circumstances of work & Method of

working ?
 Variation & Changes

‘Change in the delivered scope, or in the manner or

sequence in which it is carried out, must to some degree
be inevitable… The cumulative effect of such
instructed changes can undermine the whole economy
of a project. A weakness of the traditional JCT and
ICE forms…is that these contracts provide for changes
to be implemented before their impacts in time and/or
cost have been resolved. Ex post facto claims,
arguments, justifications and eventual disputes over
what is an appropriate adjustment to the contract
programme and contract price are hardly surprising
results.’ Professor Philip Capper
Termination of Con
Contracts
 Variation & Changes

Owt Asia Ltd. v. CPCNet Hong Kong Ltd.

Contract for the provision of telecommunication
system for international telephone services involving
prepaid calling cards
System installed and testing satisfactory in 1999

Discussion went on to fine tune the system

Payment of installment delayed

System crashed repeatedly for unclear reason

 Variation & Changes

Owt Asia Ltd. v. CPCNet Hong Kong Ltd. (Cont’d)

“In this case, it seems to me that the persistent failure of

the Defendant to pay, or even to respond at all to
demands for payment which I am satisfied were made by
Mr Lee to Mr Chang and the Defendant, does evince an
intention on the part of the Defendants not to be bound
by the contract between itself and the Third Party.
Further, I am satisfied that the Third Party was thereby
entitled to, and did, regard itself as released from further
performance so that it was justified in refusing to carry
on with the UATs from the end of September 1999. The
consequence is that even though the Third Party might
otherwise have been in breach of its obligations to the
Defendant by failing to deliver the postpaid software, the
Defendant not having terminated the contract on this
ground, it remained open to the Third Party to perform
that obligation later, until it became itself entitled to treat
the contract as terminated so as to free itself from the
obligation to do so.”
 Termination of Contracts

Where one party so conducts or expresses itself

as to show he does not mean to accept the
obligations of a contract anymore
Effect:
If accepted, discharge of innocent party from further
performance and entitle it to immediately to sue for
damages
If not accepted or affirmed, innocent party may insist
of full performance on its side and sue for the whole
price under the contract
Labels: “determination”, “rescission”, “treating
the contract as repudiated” or “accepting the
repudiation”
 Termination of Contracts

Termination under the Contract

Forfeiture Clause
Bringing the contract to an end in certain
circumstances
‘not proceeding with the works to the satisfaction of the
Engineer’
‘not complying with the Engineer’s orders’

‘not proceeding with due diligence’

Side Effect: Licence to occupy the site revoked

London Borough of Hounslow v. Twickenham Garden

Developments Ltd.

Mayfield Holdings Ltd. v. Moana Reef Ltd.

Agreed consequences [e.g. Clause 81 of HKSAR

Government CoC]

 Termination of Contracts

Termination at Common Law

Thomas Feather & Co. (Bradford) Ltd. v.
Keighley Corporation
Contract to erect houses with right to determine if sub­
contracting without consent
Employer asked for extra costs to complete
Held: Not entitled to extra costs
Architectural Installation Services Ltd. v. James
Gibbons Windows Ltd.
Labour-only sub-contract to install window units
Held: Not able to rely on clause to terminate but still
able to rely on common law
Dispute Resolution

 Dispute Resolution

Litigation
Court System in Hong Kong – Small Claims, District
Court, High Court (Court of First Instance & Court of
Appeal) & Court of Final Appeal
Pleadings

Discovery of Documents

Interlocutory Applications

Exchange of Witness Statements

Exchange of Expert Reports

Trial

Submission
Evidence – Examination in Chief; Cross Examination &
Re-Examination
Practice Direction on Mediation
 Dispute Resolution

Worldwide Trend towards Alternative Dispute

Resolution
Types of ADR Processes
Facilitative

Advisory

Determinative

Advantages of ADR
Party control

Flexibility

Speed

Cost

Hostility

Expertise

 Dispute Resolution

Mediation
Mediator Assisting Negotiation

Output – Voluntary Settlement Agreement

Shuttling Diplomat at Impasses

Process

Pilot Schemes

Arbitration
Legal Process under Arbitration Ordinance
Arbitrator
Output – Award, enforceable easily as a judgment of
the court

Arbitration Agreement in Writing

Stay of Proceedings/Enforcement of Award

Dispute Resolution Advisor and Other ADRs

 Dispute Resolution
What is evidence?

What is good evidence?

Importance of documents

Persuasive force of written records

Persuasive force of absence of written records
Records at the time
Records passing between the parties
Gaps in records?
Questions 

& 

Answers